8640. How are the renewal commissions received by a life insurance agent taxed?Alexis Longrcline202014-07-07T22:26:00Z2014-07-07T22:26:00Z23862202Summit Business Media1852583148640. How are renewal commissions received by a life insurance agent taxed?First year and renewal commissions are taxable to the agent as ordinary income. If the agent works on commission with a drawing account, the amount reported depends upon his contract with the insurance company. If the drawing account is a loan that must be repaid if he leaves, the agent reports only commissions actually received. If the drawing account is guaranteed compensation, he reports this compensation and any commissions received in excess of the amount that offsets his draw. This rule applies even if the agent uses the accrual method of accounting..Rev. Rul. 75-541, 1975-2 CB 195, Security Associates Agency Insurance Corp. v. Commissioner, TC Memo 1987-317, Dennis v. Commissioner, TC Memo 1997-275. Under certain circumstances an agent will not be required to recognize taxable income upon the sale of a life insurance policy. It has been held that an agent who is required to remit only net premiums to an insurance company, and who is under a contract with an insured to collect only an amount equal to the net premiums due, is not in constructive receipt of commissions usually earned on the sale of that policy. As a result, the agent is not taxed on the foregone commissions that would have been earned if a gross premium was collected..Worden v. Commissioner, 2 F.3d 359 (1993). If the agent is not unconditionally obligated to repay advances, and any excess of advances over commissions earned would be recovered by the insurance company only by crediting earned commissions and renewals against such advances, amounts advanced to the agent are included in income in the year of receipt..George Blood Enterprises, Inc. v. Commissioner, TC Memo 1976-102, Rev. Rul. 83-12, 1983-1 CB 99. A life insurance agent’s advance commissions received in previous years are taxable in the year the obligation to pay is discharged..Cox v. Commissioner, TC Memo 1996-241. With respect to commissions on credit life insurance, an accrual basis loan company which receives commissions on credit life insurance, but which may be required to refund a portion of the commission later if the loan is repaid and insurance coverage terminated before the end of the original term, includes the entire commission as income in the year the coverage was arranged. It may not spread the accrual over the term of the loan..Rev. Rul. 75-541, 1975-2 CB 195. When an agent purchases a policy for himself – on his own life or on the life of another – the agent must report the commissions as taxable income even though the commissions were never received. Such commissions are considered compensation and not a reduction in the cost of the policy..Ostheimer v. United States, 264 F.2d 789 (1959), Rev. Rul. 55-273, 1955-1 CB 221. This rule applies to brokers as well as to other life insurance salesmen..Commissioner v. Minzer, 279 F.2d 338 (1960), Bailey v. Commissioner, 41 TC 663 (1964). Similarly, if an agent sells a policy to a friend and waives his commissions, the agent must nevertheless report the commissions as taxable income..Mensik v. Commissioner, 37 TC 703 (1962), aff’d, 328 F.2d 147 (7th Cir. 1964).